zITnr STATES DPARTMMT O. ACRtIOCLTai
Breau of Agricultural cnuoraice
DiTvislon of Cooporativa Marieting.
SUSIDIARY CO.PORATIONS A'D CCOPLER._I'oE '.ZOC ." Z"
A Preliminary Report
iasBhiagton, D. C.
This portt presonts
some of the ruc'ults of research conducted by
Tho Division of Cooperative MarLt'Ke g
ia the organizations a.d operation of
SUBSIDIAST COQPATIMNS AID COOPEUAZY ASSOCIATIONS
: + BF L. s. talbert, Senior Marketing Uconoist.
Baua of Agriloltural 'oonomice
1 A subsidiary corporation is ore owned and controlled. either
: directly or through trustees, by another corporation. Ooma&n-ci.al corpD.."-
tions for sny years have formed and employed subsidiary corporations, and
: recently oroperative associations have organized subsidiary corporations
iiii to enable tnem to conduct their activities to better advantage or to moot
S specific situations.
Probably th. oabef reason for the creation of subsidiary corpora-
1 tIes has been to avoid the payment of ta.es imposed by Stte-s upon fcrcign
W p-rations. All, or practically all, of the States impose a special te-.
IPon foreign corporations whtch do an intrastate business within their
borders, and corporations operating in more than one State in nucmrous in-
... *tames habe formed subsidiary corporations under the laws of such States
tlroout which they have conducted their business in such States, thus
Ktwidiag the peament of State taxes upon foreign corporations.
: Of course, if a corporation is ergaeed In interstate commr.rcu, no
I State in which it is so engaged ha the right to tar. the privilege of on-
w aIIIa W e in such coanerce. Attention is called to thz following quotation
S from the opinion of the Supreme Court of the United States in the case of
Iahbnka-alker Co. v. Bondurant, 257 U. S. 282, 291:
p *A corporation of one State maW go into another with-
out obtaining the leave or license of the latter, for all
I the legitimate purposes of such interstate cowmercu; -nd
If any statute of the latter State which obstructs or lays a
burden on the exorcise of this privilege is void u-nder the
bay cooperative associations are now doing an intrastate businezc
I. various States and so the same reason that has prompted t'.hu or...t-.:
of maW subsidiary corporations by coaroial corporations thu avoidance
of State taxes on foreign corporation woulJ undoubtedly, in some ista-cts,
brig about the formation of loc-l subsidiary corporations by such ;ooPCr_-
In weamral, one of the tai. reasons for the formation of a corporptioI.
of any character, namely, limited liability on tia part of tLo. ta at rec..:;-
t .rs or stockIolders, tists as a reason for the formation ot nubiditary ccr-
porztions. A cooperative association, for instance. riigit be ,-illz:-_g to
haiard'a certain portion of its assets in a given activity out "oz1d not .--
to risk all of its assets with respect to such activity. Under suc. circa:-.
staces it zs be desirable to form a subsidiary corporation for taU nraobL;
of conducting that activity.
The Mlchi&an State Yamr Bureau at one time oenaped in a number
business activities. Now, all of these activities are handled by f r.
subsidiary corpori.tione, all of the stock of which is owned by the Mteb'
igan State Farm BE.reau. Bach corporation, including the parent orzgaitali-l
tion, has the same board of directors and officer. One of the sdb1iUii|
corporations handles supplies, another sueds. another wool and the fO *
ha.dleso poultry. ...
A cjoporativu aasoclation could be organized with authority tb:..:.
handle every type of agricultural product produced in a given region.
contract covering all of such products could be entered into with ea ..ch ....
ue4bicr araL then for tho purpose of effectaing a separation of the vwarhio.....
acttivities involved in tho handling of the diff ront products, *ubWIda 5
corporations coull be formed for the puspose of handling and mark*ii^. =.
each. of thu product*. :
Diffilulttcs with rospbct to income taxes may arise in t.hes C .fa.l
cooperative eusociations, primarily organized to market specific fernle....I
dacts, out of a question --s to the prpor scopa of their corporate poWM s.
ani ctivities. Thu activities causing, these difficulties.it is beltS .,
in m- ny irst.,ccs eould be segregated through subsidiary corporation #0 ::.":':
txat th-y would not affect, from an income tax standpoint, the general .a6-
tivitisB o" tah association. .
...... .;.. : : .:: .+"v 'itit
in f!-ct, if a coopL.rativb c.nsoziation in any acae found that the 41ot-'".
act of a partlicUra; activity complic-ited its income tax problem, it uitt
bo 'F-viz-bl o g0 ivu corsiduratjon to the formation of a subsidiary ooptr0a: 0h;
t-on to coa':-t the particular acti-ity. Of course, if the subsidiary :a.. H":
pOfits, it rould be liable for taxes on such profits, and any divid.en ds I
v.,icb a cooperativ'de easocatioa ni-ght receive .n any year from its subsidtmfA lll
lu pron;r c.acs ro0ul, UlsO o,. t.--x.a.lu. :: .;
.. ::. "'" :ii
The for-itio:i of P. siujstuiary corporation eyv f.ford a means of boanFi.:tt M
i." rc.icy whizh could not oth Lrwisto bu as a-ii.y or atvantaGoolsmy obtalaed.,
tnroureA tae pla in; o;2 az sc,.o .7?t: r. stabsidi&ary coporation tbat would net: be
Uubj6cCt, to t'A Ueb~r of The :a.M-vnc co-porat'on. The Cooperative trang i'O
"FAdur-tI:n Echargu of Ithac., ."w York, ha=: eo-loyed *ubmidiary corporaWt1Mn
in its oporAtlonL. F:O- ii.st-.01CL, At ur;ni;od the L&w "York Lgrtcutural Credit
%ror;tton. In"., ',ith olitces et It:Csa, e-V Tork, for tne pan-pose cf in-
crscin.- credit facilltias. Thise corporatior- eador.as the notBes of farnrs a-a
j.-j:. ThI procucis aorivLd frou notes thus handled azre returned to the co r- ;
:arati.in 1";.:ct rczits thiL to tfaw parson to whom credit is extended, lesse
No atteqt is henre ade to enumerate all of the reasons that may
Wst tor the formaton of subsidiary corporations. Thb laws of a
ut1s1oil.mlar ftate aW virtualy comqel the formation of a subsidiary
:W W&tiion. She Ul-u. K .aiuin Growers of California, for instance.
A 4 .. ties of its re6rgaslzation a few years ago wan desirous of obtaln-
1 flpital than it believed possible to secure from Its prodacor-
Si n ..Consideration was then given to the solline of non-voting pro-
1* tn*d stock to outsiderss, that is. to any person who mzLht care to
purhase such stock. It was foucd, however, that under thu laws of Celi-
tort.& it -"as not possible to issue stock that did not carry thG right to
v ote. In addition, it was thought that the issuanco of prferred voting
Stock In the Sun-Maid Baisin Growers of Cilifornia to uon-producarc voonld
operatee to prevent the association from successfully snoring that it was
Soperting under the Capper-Volstead Act.
In view of thuse circurmtances a subsidiary corporation under tho
laose of Delaware wu organized with common and preforrwd stock. All of
!*= th=eaaa stock is owned by the Sun-Mat.l Laisin Growers of California,
V whMe the preferred stock, which is non- oting, has been solar to non-
prodwers as well as producers. ZInsuach as the common stock is thu only
stock which carries the right to vote, the Sun-Maid Raisin Grov :rtj of
O*i afornia controls the subsidiary corporation to which it tr.ancferrn.
oi ratan processiecplante and. facilities, which process thu raisins re-
ceiwd by the Sun- id saisin Growers of California from its menbrrs.
SA cooperative association mnt be authorized to acquire thu stock
o f Other corporations, or. at least, of a corporation of the kind it
41sr1s to form. If it is to form a subsidiary corporation. It will be
: a: sered that at cosn la a corporation, generally speaking, was not
anthorised to acquire the stock oat other corporations. (First National
Baig of Ottawa v. Conversu, 200 U. S. 425; Central Life Securitie: Co.
vo. Sath, 236 7. 170.)
In-View of this common law rulb, a. cooperative asso.iAtion t: .fore
atteWtiUng the formation of a subsidiary corporation should ascertain if
It Is authorized to own the stock of & corporation engaged or to eng.ge
in the business in question. TLe ch-arter o?" the cooperative, the corti-
tutfon of the State, is statutes pertaining to corporations, .-Ind thu
decisions of the courts of the State regarding those matters, should be
entnrud. If a cooperative Js authorized to engaged in an activity it
ay be that It will be found easier to form a cubeidiary for 1onductinp
the activity than if such were not the case. indbr these circriLjt3-cCs
the subsidiary tAmght be-lookod upon as simply a mcans to an end.
It will be remeatered t;at restrictions with respect to tho nL.rs;n!;
eligible to own stock or have membership in a cooperative havu. no dirLzt
application In determining if a cooperative my bt a member o7 or L.l,
stock in another corporation. In soma instances it may be dz.u.u 5u'.-A,-.b.
or found legally necessary to raise the funds to be inyeeted :a a aeutLt-.y
thioth dedmctions specificall-, authorized for the purpose by U pro'.''L, .;
the contract. It will ba borne in mind that only those deductions .Th. .
aUtriused can be made by an association. Silveira v. ssuci.ted 1".ilk ?:r-
SdMOW, (Calf.) 219 P. 461.
AB a rla It Is believed tiere wiil. be-esn @lTXicR&17 IL 4wan%"1
Lag authority for the formation of a subsidiary by a oaWopatil if t ai ;
subsidiary is to enge in an acttvty closelji related to the bWinas .
in bich tho cooperative is engaged or aeceesary tin connection theni.
wth. if integration with respect to the products hatLled Is to tao H
placo. ..... .. I
Again, if the proposed subsidiary is to engage in an activity "
which would be wholly proper for the cooperative association to *a E
I n but which for anr reason it is deed advisable to have Perforwmd bl .
a separate corporation there should be little difficulty in finding .,
authority for tho fornatioL of such subsidiary by it. For instance, .,
soIm cooperatives havo formed warehouse corporations pri arily to cof..:,.
duct warcousea in which to store the products they were eswged, ini
narzxtinc. Thay apparently had only normal difficulty in doing go. ,
.ith ruscoct to subsidiary warehouse corporations. care SR O ":.,..
bo cxerxcisd to melce certain that they at all times have "a open,01 ,
cxclusivo and uaoqi vocal possession" of ths product stored. (The : :
;3curity ,rchousine Co. v. Hand. et 1., 1-13 F. 32, 206 V. S. 4156)
3 othur words, cLre s-ould be exercised not only to hold out to the
world th.--.t the rnbsidi.rv co:-poratlon is the "wa-rehousamfn" and not
t'. corura.tivu association. but also that the w-arehouse corporation
r,;coivcs and delivers products and exercises complete control over tha ei ,,
ral.il in :toraga, just the snam as if the products were stored with a.
.trict.y uomacrciali warenouseua-n. Thi books ana records of the warea-
1,U.S-I corporatior. should te rep.arate o-nd distiactt froam those of the "
cQccr-.tivc a-ICsociatio L.Lnd in all ru;rpicts thae warehouse corporation
...;lu' function as !7.m in-ep.3udu-jat -entity. Jhesc matters are highly im-
p; ". zs: t :.u "-archotso re-eiits ara to Le .Lsee. for collatoralJ p-urposes.
.Zn- ttrsdra will Aot loan on :;he receipts -X cOllateral if the ware"-
:.u i caroro.tiun aoes nat in a1 rosaecta -"unction as an independent
LZtAity Laa excrciso an aorolutG, e::cltsive L.nd unaQuivocal control Ovt?.:,
t .:u rodtxtz stor-d.
So.rt.rac stsiai-.ryv co.r-orations have bcen organized, the stock
S-.c. -r.Ls. -y h 4 ;crtZi.i pajrcara rs trasteors for thn parent curpQr-
_ti.in. Fur ir-astnce, in thu caru cf -l-i- Intursteo.t Tu.l3phone Go. V.
I. .j -P are 'I, tA tAhe4
-.-.i"--rc & uI~to TUlaphrZt; Ic., 51 F. 5-, F. 20. it pL-ared that thI
,.ltin-or. & Crto t.1dlroad Zo., cr1ud throua, t Bustees ail of the stock
of thu E<iror? & &hWo 94I.lpnrsu Gc.
it 1la siuuztttth. t'-.t in soa .fnl5fLCr.^fS in which it appears im-
i- .;-^. f-ou :. l-.u rtPna'oirt, f'or a cooperative to organize a sub-
uii..ry," -. ,~.wn t: tcz- thcruef. it would be possible, if demoad ad-
v I- A", fo: t.Ut .oo$Ir.AiVO tn or-rirzo e Mlnbsidiary taroarh its direc-
';... > ? err'Mr smluclcd by it, t3 whom tho stock could te its'ued, The
.:.-tit 1.Coc:; ticla cO2li4 t.tc-. unalsni prohibited from 'or
.; +... o t.. Lub*ilqra i..d, na Fuu'rlty ttIrofor, co'tld hsols. the
1o0./ ct t .s 62b~S~i'y.,Propuojrltj Iraw. contracts covering the relation
;.,- 4.:,.:rt.*.tv t; thj auti.t.r" could be onterud into.
- 5 -
Th'b statutes of many States providing for the Incorporation of
I.jrporatiocs state that they -ay be formed "for nay lawful purpose."
tin phrase in the caae of Dittian v. Distilling Co. of America, 64 IN. J.
537, 54 Atl. 470, tas hold to author-izu the formation of a corpnra-
tUon to hold stock of other corporations. Weicnt was civen to the fact
that corporations of iew Jarsey whea fortad wera wathorized uUder ito law
III' to hold stock of other corporations.
,i. It is obvious that the fundamental principle upon which subsidiary
j corporations are rocognised as separate aui distinct from the parent cor-
S porationa A-ises from the fact that coach corporation is a Pop.-ratc rua:
distinct entity, a legal artificial person, and mast be dt.alt with
|ii,,, ~ The case of the United States v. American eBall TolZphon Co-&any,
29 F. 17, decided in 1886, is one of the first cises involJil subsidirLry
S cOrporations. The American Sell Telephone Comrany received froc ,J.x'-L:ur
GrabmM Bell certain telephone patents and thereafter orocf.cd.;d to ct.'.C-
11 8h telephone facilities in various parts of the country. Tt rlid this in
g eeeral through local subsidiary corporations which it owned oithc:r "-oly
or in a sufficient degree to enable it to control them. The ;rrt.n Bol
bilalphons Coipay, as a rule at least, furnished the capital nee'mu-, tr' tne
local subsidiary corporation for the purpose of enabling. thuc to cEta:-
S 11h telephone facilities. The United States in the case Ladcr iizcucsio:
[+ .. brought suit against the American Bell Telophone Co.rpary, and cl.h.a tin.;
p process had. been served upon the Amaricen Bell Tolephone Company ;' reason
i ..Of the fact that process vas served cn an officer of a sub'sidiary cor.orL-
ticn of the AMerican Bell Telephone Company. Thb court, huld that '.2
A iWrican Bell Telephond Corpany had not been served with process in tc.i
iiii tlt a.n hence wa.s not a pirty tLhereto. in answer to tLhe aruafnt tlhat
the Amerilan Bell Telephone Company was engaged in buaints in thu jarisU-
S diction because it oneaod tLhe subsidiary corporationn an a rnd furnished it
W ilth the means for enabling it to do business, the court said: "For .r.c
person to supply the muans to anotiaer to do business with or on ic rCo
the doing of that business by thr former." In othbr rords, t.-3 court ..
S that the American Bell Telepncnt; Coopary vas not engaged in businc.s irn trhc
Federal district in qcaestion and. hence could no; b. sued thurcin.
In the case of the Peopli v. Americaa Ball Telephorn. o., 117 '.
241, the same general situation, the status of a subs!diajy cowpo-:.:t:n
of the teric:.n Bell Tulewboie o-penj, w2s cgaln involvCd. ?'> follow r.
quotation is taken from the otAnion of the court ir tLis c :..
I1t Is manifest that so ma.sh of the ar-guznta: o: f;.
court below a.s Is based upoa the f.ct thaat the ,'.ric-n
Bell Telephone Gomuany iL a stockholder in the local CC ..f^,'-
derives no support fror that zircumstanco. In no I- Xi LL:iu
can the business oft a corporation be said to be tlt of t'..
Sindivlidual sktoldoa. it is trte that they hfAve wt. irtcr-Lt
in the business carried on and an influence in controllir.-: iZ..
conduct; but tney have created a I2ol entity to rrot ,."'*t
;iii such businesses, ake its contracts and be resporsibl for '..
obligations, enm that entity is alone responsible for its ....
obligations, and that entity is alone responsible to personS
dealingr4 with it for the conduct of such .asiness. The taxation
of a foreign or domestic stockholder in & domestic corporation
-poa the bainesr of such corporation upon the theory that it I
-:'s his business would be an unreasonable exercise of the :
powers of taxation and such a tax upon the theory that a
licensor or Lessor retaining title in himself to a patented
aLrticle, borrowed or leased of him by some person or corpora-
tion for the purpose of carrying on a trade or business, was
itselff carrying on such business, crn aot be supported by
any knor.n principle of law."
The cass of Conley v. Mathieson Alkali Works. 190 U. S. 406,
Lo03t- In tne State of New York. The trial court referred the case to
r.-Ftor anri the concluding part of his report read as follows:
"'Upon the facts thus outlined, it does nft appear
that the deienaant corporation was, at the time of the service
of the sw==ons herein, via., April 18. 1901, doing business
ritLi'i L-his State.
"'The f:ct thAt it held the entire capital stock of the
Yastntr fleutrolytic Alkali Company La.d that the operations
of tict corFpa. werej carried, on under tLe same management as
Lofo:r Decon,-bLr 31, 19S00, is not material. The new corporation
I.=G sup-ra.te lecal entity, and whatever =&y have been the
r:otivez leading to its creation it can only be rearaed as such
for t.e purpose s of legal proceedings.
"' It w 3s that corporation alone v.hich transacted any
Usin',-.sz in tais State, notwithstanding i. nmy have been for
-& r-1 ical purposes mreroly tne instrudEnt of the defenda-nt
car&urtioi,. eFoople v. Ax. Scl Teleph.one Co., 117 ,.Y. 241;
'at d 'a. statess v. The Saze, 29 Fed. nep. 17.'"
..u .pki ntif cxcc+oa t*o the report of the m-ster -id the case eventual
--t LL. t.: ;uprcre:A Zou.-t l tr.e Unirted States. wiizh court appro'ringly
.t'- t..-ce i gaL 1rcv tue &aster'c report -iven above.
tr -7 r ?tcrn' v. C-iC t.., 'ock Island : P. cific Railway,
'j* .j -: ,..j court said*
"Trie nftw corporation was a. separate legal entity,
S>.:.t,.r7 nay h'ive been tLA mMCtlves leading to its
".... tinn, it can only be rcnariei as such for the purpose
1f, 1. pr roLcuidnr-. It vwas the corporation alone which
tnr.'_.&..'.d ad'i/ ur.iEnevs in tnis State, notwithitaading it
:r-..; ,.v.e utcn for all practiw-l purposes merely the i astrumneut
d., r. *-*f n.'rrt corporation. People ". American Bell
I.. ..:,'1 Co., i17 1i. \. L:-l; Jii ite1 :;t.ttcs v. A ericMai Bell
IA 'i+. *.J: .L.. .. "cri. i -ip. 17 ."
- a1iii- ac
S..In the case of Philadelphia & Reading Railway Compainy v.
Mcibbin, 243 U. S. 264, the court said:
"Nor would the fact, if established by cou-petent
evidence that subsidiary companies did business witLin
the State, warrant a finding that the defendant did
iT ,In the case of Trimble v. Railroad, 199 Mo. 44. 97 S. W. 16..
attorneys successfully brought suit against a corporation for t :
recovery of fees for services which they claimed they haJ perfra.c.
for it. All of its stock and bonds were owned by anotLer rilrxiJd en::-
pany. The following is taken from the opinion in the case:
| .. "The stoc.aholders of a corporation direct it- busin' s:;
u they tiinc is beet for thuir owv interest, anr -- it
| 1so happens t.-t the persons i-ho 0o711 the stp2-: in )mn
|p r''orpo.-.tion ire alao te-L' o..nurs of t-h ctcck. in 3,.'.h.z
'-oriany- and conceive it to be tu thtir interest to 1::c:
one corporation Eubccrvi'snt to the ether, t'Vcy IJ.vt a
'.. f-ijht to do so. bec:rc. they nra. dlir. vwith t:.cir oa..
1,hat iz here said ic of course sub.iect to this cUllii"ic3-
tiara, that is, tl.. tiL conduct o0 t.- ctockolu,
SrenCerin; onu corporation subservient to another ic :'.lid
Ionl" ,-hen it is not in viol-.ticn of &iny- i'7 forb-'iin,- 1I.
"Lu but th.are is no such question hre, %-1 :u-c: now LC- el in. :;iti
=., ahbject in which an owner of tr.o properties cz-n fit tc
|i UZe Cnt: to the advarcemerht of the utL',er or boti an L ;.tl
advancement. In such case, neither corportio; l- _c. it:
C t rporate entity."
It is interesting to note that in this case it ii irntr,-.tr. 4.'
only domestic corporations in the State of Louisiana may Cce:.. t.._
pawer of eminent domain.
A recent case with respect to subsidiary corporations deci'i':u b"r
the Supreme Court of the United States is tnat of the Caanon tnai: t.r-
ir' Copany V. Cudahy Company, 267 U. S. 333. It appeared ti,. t ix "U
fendant, a Maine corporation engaged in the packing bLzinenes, E st-k t- .
its products in North Carolina through a subsidiary corporation 1.*'.. At
for-cd. u=der the laws of Aabama. It owned all oi the stock of t...j L -
sldiary corporation. The plaintiff brougnt suit against the jnc.-:,.
ccmpany for a breach of contract to purchase cotton sheetin; for c ;.- i:
^acjg &eat. The question for decision was whether tue dcz' xi, .
dCoang business in the State of North Carolina in such a mancor "r.:. to
sucr. an extant as to warrant the inference tnat it was prescEt t,-:r.
|| Fcr 'te purpose of showing ttat this was the case, the ilant:ff a.-:cr-
S tcok to establish .the identity between the defendant and tie ALL.>
|i crporationc. The court said:
i|l|- cThre Alaoaa corporation, which has an office ,n "or'.z-
t Carolina, is the instrumeatality employedd to m.arket J..ka.liy
products withia the State; but it does not do so am defindaati:..'.
agent. It buys from the defendant and sells to dealers. In
fillment of such contracts to coil, goods packed by the defea|i,
ant In Iowa are shipped direct to dealers; and trom them the
Alabara corporation collects the pu-rchase price. Throub ownw ril
ship of tli entire capital stock and otherwise, the defendant :ii
doninateu the A.labama corporation, immediately and completely; & *
and exerts its control both cocmercilaJy and financially in Is
substantially the same way, and mainly through the sama iJndiuid- i
ualc, as it does over those selling branches or departments of i
its business not separately incorporated which are established |
to market the Cudahy products in other States. The existence of ':.ll
the .a'bams. company as a distinct corporate entity is, however, .i
in a!l respects observed. Its books are kept separate. All .
transactions bet-7een tie two corporations are represented by.
a&,propriate entries in their respective books in the sa=e way
.a if t.ne t--o were wholly independent corporations. Tais cor-
jorsate separation from the general Zudahy busianass w.s doubtless ,
adopted solely to secure to the defendant some a.'ar.ta8e 'irer
the loca-l laws,
:he defendant wanted to have business traAnsactions with
persuns resident in Yorth Carolina, but for reesons satisfactory
to itself, did not choose to enter the State iL, its corporate
;aracity. It .ight Lavt. cond-ucted bucJ. business tlhroagh an
indepcn,'cnt agency *:ithout atuijectiAc itself to the jarisdic-
tion. (Lazr of Lmnerica v, Wnitnay Central National Baak, 261
U. S. 171. ) t ire:erred to e-ploy a s t1iiiiUA.ry coL-poration.
,onzress has not rruvtdrd that a corporation of one State shall be
:=enable to suit in the fecerEl caui-t tor another State in which
LIc -laintiff resides, the3ever it e-Cploys a suasiiJiay corpora-
tion as tAp instrunmeBtaijity for Loinfl uusinesc ztrein,
-he corpor-ate separation, thougn perhaps meroly fo.-mal, wa
real. ;t 1.. no pare fiction, Tere is Lere no atterapt to
,oii the rjfeu,--A ,iu2]c for an ac' or o-nission of its sub-
i:i.i.r' or to e:-ifcrcce a aaiLr.st t:.. i-ttjr a liability of ;he
?:ut wna.to-cr cri-t Le other ie-.! ccisequences of the con-
ce:i:r.tion, we c-;.n:t ,.y t.ni* for p'-pcset: of ,jurisdiction.
'.u L inLs u1" of;'o L._L.r. ororrtion in North C uolina became
t lu jdj-ir'2k"^u of tt't3 COIfl'fnlrC "
010 Lb LJO r OF .4 c'4lran6 &1 tca Car GoiLp!Lqy :. 4iszoiri pacific
-at..cy Co.4a.-', I1 li. 1 "'i, "oje unret our-. held that 4'-e egreeuent
-: tn;.c :tL-.LZ.1y I ZC;4t4 t :.zu' cz-rs ovJr r.x rc-;s which it c.:.led or
*;, Li. 'ntco1 h, .i not-ishp, leis' or ctl'ern:iso," ei-d L.ot obl.-A it to haul
S.- nvtr :'. connrctiqf Linu 0of notiier coLw:Ay "all or nearly all its
* ..':" *J n it otsnc'. :r tS cae the cc.irt o=phm -sied t1- fjct that
*'..u cct-^urA.ln wece in >'L.ct..op.rhtoly oer..tOe..
IP n the case of In Re tatertown Paper Co., 169 F. 252, the court
..... + id :
"The fact %hat tCie stockholders of two ser:rXtely
chartered corporations are id.entieal, thK-t onf o-as siWre
in another, and that they have mutuel dealins, 7ill not,
as a general rule, merge thaw into ene corporation, or preo
vent the enforcement against the insolvent ealte of the
one of a; otherwiTse -alid claim of the other."
In Lange v. Burk-e, 59 Ark. 05, 61 S. W. 155, a c.Le in which tae
two corporations involved were practically controlled o: the seBet stock-
holders and had had intimate business relations, inclutnAi the employ'Lcnt
of the same bookkeeper, the court held that the clai.n of one corpo.c-.tion
would be enforced Lainst the insolvent estate of the other.
It is believed that the only 1rst*-.aces in %hicl tLe entity of a
subsidiary corporation will be disregarded arce instances a.,aiogoow to
those in which tLe separate ldeatity of any ot-er corpooraton roulAI bi
d1isregardea. To prevent fraud or injustice, tue courts wil. disretrrd
l the separate identity of a corporation anl will lock tehinrid th. foray
to the substance. Soma of .he cases in w-hich tLe sca.rate idea:tity of
a cor2oration has been disrec3rded will now be discused.
if : ;& tUe case of the First Natio al B-k v. 3. 2rebeia. 59 Ohio St.
9 316, 2 a. S834,, a debtor in lailiog circ'rstances fored a ccrorption
Scon-istina of himself an: numbers of his family and conveyed all hic
property zo the corporation in exchange for stock issxjei to him, %'bick'
stock he t=aediately placed rith nis cre-.itors as collateral secu-ix,
while me retained control of tne property and manzged. it as President oi
the Coropsy. The conv'ey-rAce was held fr.ui-- e ut, end, &mong other thing:,
the Court said: *The transaction cannott be iicenei to a convey:"nce to a
third person for a valuable consideration -- or.Sidered in the lirht of
the facts, it was no wore then ea conveyance from himself to hizelf.
The corporation ras in substance another F. C. Trebein.."
In Midnifie v. Rowley, 187 Cal. 4-81, 202 P. 67S, it ap.peareld -.V.t
Rowley indivldually- borrowed $10L.000, giving his perscnml aotes Lre'efu:.
Subsequently a corporation own3d by him renewed the loan by .itns: ats
note for that amount. Tlie holder of the note, after its aat.irity, s5F.d
the corporation and Rowley or 0re deot, p rn tth Court held tiat Ro-.eoy
was personally liable. See also J. J. AcCazckill Co. v. U. S., 21A.; J. '3.
50i, 54 L. Ad. 590; State Trust and S-.9vizE B-ank V. :.er-oc6 L-tlu JnJI
battlee Co., CL.,) 240 p. 46.9. In this connection, the fojlo.!ro-inr ('o -
sion from the opinion of the Spromse Court of Uar-land in the c:. e ot
Carozza v. Federal Finance u C.-edit Zo., 131 ;. 33 is of ir.taie&t:
Tone equitable rule that the form of a corpora-9e
entity &y be dieregardec wLere tLe ownership of all. of
its corporate stock is in one person is rot of gerervi-
application, but Is cotmxonly limited to those instarces i.
which it become necessary to disregard a formal corporate
existence to prevent fraud or imposition or to enforos a
paramount and superior equity." "
The Supreme Court in the case of the Bart Steel Os. w. The
Railroad Supply Co., 24- U. S. 294, applied the fundamental rule of UM:t:
that a judgment of a court of competent jurisdiction is binding upon .a
the parties to the case In which rendered and their privies in a SituA e :
tiou involving & parent corporation and its subsidiary by holding that
a judgment rendered against a patent owner in a euit brought by him for :
infringement against the parent corporation could be pleaded as a bar
to a suit brought by him against its subsidiary.
tain, in the case of the Chicago, U. & St. P. Ry. v. ULiMnn.
Civic association, 247 U. S. 490, the court held that the two railroad
companies involved could not, through the medium of a short terminal
railroad which they owned Jointly, discriminate Against shippeos whose
caers were handled by it by requiring such shippers to pay special
handling charges on account of the fact, while shippers receiving Msub-
stantially the same service, but w/hoe cars did not pass over the terAtel
line, were not required to pay such charges.
The courts by reason of a statute may have to disregard completely
or to a degree the entity of a corporation.
The case of tne U. S. v. D., L. & W. R. R., 338 U. S. 516,
which arose under the cocooity clause of the Epburn Act illustrates
this situation. This act was intended to prevent railroads from occupl-
ing the dual and inconsistent positicna of public carrier and private
shipper, and in order to separate tne business of transportation from
the business of selling, the statute made it -unlawful for railroads to
transport in interstate conjarce any coal in which the Company had
"any interest, direct or indirect." It appeared that the railroad com-
pany, prior to the passage of the Hepbtarn Act, bad engaged in the busi-
ness of zining, buying, transporting and selling coal. Following the
passage of the ;Act, Lhe rallroed coiapany "decided to adopt a plan by
which to divest itself of title after it nc. been mined but before tram.
portation began." It thereupon caused a coal company to be incorporated
i..vin. stockholders ard officers in common with the railroad company.
The two corporations, raving a common n.nageient, then MSae a contract
prepared by the ra.ilroad compam.y under 7hich the railroad company did
not go out of the ci:dan a-.d Lelling basiaess bat when the coal was
brouht to tho surface tho railroad company lost title by a sale to the
coal coaipaly fA. j. b. mines and instantly regained possession as carrier.
;t ret+nau taiet powitiorn iuntil delivery to the coal company which sub-
^e;^*er.ti;y puia tncrefor at the contract price. The relation between the
railroad cor-pany ni the co-al company was covered by a comprehensive con-
tr-c.c. c'r.t-.iaing irovisionrM restricting and limiting the methods that
r-jttr, be 1AjF8lyed -L. the coal co=. pni and the powers which it night eaer-
ciseC. +ihe 3u1remJ courtt decided the caze against te'U railroad company
an. -*Ic tr-JLt It c.hoid be enjoined from transporting coal under the con-
tra-ct i:;. -;cs'.ion. .r.o bar is for the opinion wa3 the character of the
p .There are cases in which a parent corporation bas been held
5.01be on amount of acts or damages for whiob it claimed its subsidiary
saom was responsible. It i. believed that all of thkse cases will be
Sfoand to involve situations itn which the parent corporation lhas failed
to treat and deal with the subsidiary in all respects as s an independanut
distinct e. tlty, or because the contract involved was with the parent
NP In the case of Joseph R. Foard Co. v. State of Maryland, 219 F.
827, the parent corporation was held liable for the dazmiges caused
through the explosion of dynawite on a slhip tba was beint reloaded by a
-subsidiary corporation, which It claimed w"cs an independent conaLractor.
In this connection, the Circuit Court of Appeals fo: the Fow:th C&rcuit
'Who District Gourt was clearly right in holding
untenable the position taken by the Foeard Company that
the loading was done by tae Genera] Stevedornc Oonpanj
as independent contractor an that it alo8e' was responsible
for asy negligence in handling tho dynamite. Whatever vay
have been the original design when the Foard Company caused
to be organized the Geaeral Stevedorine Coorpans. the evidence
i leaves no doubt that the stevedorinc, whether done under o:.e
Ior the other corporate names, was i; reality but a department
? sof the business of the Foard Compa.ny as ship-brokerso a.nd
I" agents. The two companies had the same officers; the Steve-
dori g Company handled no Jfuads, except through the Foard
Coupanay; its losses were paid by the boardd Conopoiny and delt
with as if they were that Company's own losses. All of hLe
profits of the Stevedoring Company were kept by the Foara
Coopeny as a charge for iauaging the business. Thare are
other lika c1rcunstances, but these are 3uffici.nt to snow
that the Stevedoring Comioauy was organized and controlled anc
its affairs so cond. .ted es to wake it a mere insrruu._ierLlity
of the Foard Company. This being so; the two ccrporation2
m=st be regarded, as to the outside public, idoetical.00"6T"
It Is submitted that the foregoing lanczage of the Court js
materially explained, a4d modified, by the following aquotaticr. from the
rSat, even if the usual current of business of Lb., t;/o
corporations had been separate, in this iratanc; ta.e co-E..rt
to load the vessel was with the Foard Cospany, and tta:o r.ir.crce
~II tends to show that it made no sopa-ate contract. with th Z(uvo-
doring Compay, but co-operated itU' ard coapleti:o cfTItTUUi. ;ya.'
contracts with a corporation is generally thereafter, with reupest]: p
stopped from denying the corporate existence of the corporation.
In the case of Lehanv. Warner, 61 Ala., 455, the Court niL: .
"It Is too well settled now to be controverted that
a party who contracts with a corporation, whether it be by
subscription to its stock, or by promise5o3J7ov,bond, '
mortgage, or other form of contract, is stopped from
denying the corporate existence of the corporation.'
In the case of Close v. Glendwood Cemetry, 107 U. S. 466, the
Sureme Court said:
"One who deals with a corporation as existing in fact 11.
is stopped to deiy as against the corporation that it bag "
been legally organized." :
In other words, the cases just cited and others of similar import
hold that one who has contracted vith an organization as though it 1wt s-al."
c-rrorpetion is estoppcd to show that the organization id not a corporation.in.
By aenal- it would seem to follow that one who has dealt with a subsidiary |
corporation as principal would be stopped from claiming that the parent
corporation was liable.
Cu March 10, 1926, the Suoreme Court of the United States decided il
the c3se of Edwards v. Chile Copper Co., 46 Sup. Ct. 345. The following
"u". tioro are taken from the opinion in the case: :
"Tne CUile Ftc-ploration Coipeany, a New Jersey corporation,
o-rned miaes in Chile and needed to borrow large sunS of money in
order to dovclop them. B.y the lan of Chile it could not mortgage
its mines offectlively pnd therefore could not givo socuity direct-
ly for botds. 2o meat tne de.fficulty thu Chile Copper Company was
orcAni.zed in Deu.ware for tho nurpose of holding the capital stock
of trio c0Liel E-lorin& Coumpany, issuing bonds secured by a pledge
t' tE B.OC., aInd .urnishling t:ie proceeds rrom time to tim to the
Frplora.tion Compaxn" to enable the latter to go on with its work.
:,r wrposo r,:a c'tr'riud out."
"..es.*.There was sore suggestion that there was only one
Lus.-nasc and tierufore ought to be only one tax. But if the one
uusinusn; cou.li r.ot be carried on T.ithout two corporations taking
p-irt in it, tac. mLst p:., by the plain words of the Act."
P..rtic'lrr attention is called to the latter hart of the language
jas" *:soie i;, mv.ch ti.e C*.%urt sa-s that if the business could not be
c.-r11.- L:. wftLU-.,t tw.; corporations taking part In It that each must pay,.
bW the plain words of the Act, thus recognizing tihe difference In identity
of the two corporations.
4.. In order that a s*-bsidIary coriore.tion May be fully recognized as
an artificial person distinct and separate fro: the ;arent corporatiAon,
care should be exercised to see that it is treated and. regarded as cuch
In the practical operations of the bsinaase.
A subsidiary corporation should be held out to tb& -orld for ri,...
It is, namly, a separate corporation, and representatio= should not :o
mad that sold rislead persons eatingg with it as to its rpaal charztcr.
parties who deal with a subsidiary corporation, when they know. or zi"--,juld
.know, that the subsidiary corporation Is nct the parent corporation, rnoul2.
Ube stopped from claiming that an obligation created by the cubcidlary is
the obligation of the parent corporation. generally. spy-akirng, it is su.b-
dttted that there Is no more r ason for allo-ing p.rs oif a3aiinfg with a
*ubsidiary corporation to look to the ?arart corporation holding itc sto=h
than there is for allowing parties Wo look to the stoeel-heders of PJn
If the subsidiary corporation is d'alt with o n a cy abr.i. J..I
it would follow that the parent corporate on -ould be liable for its acts
and conduct, for it mill bo remeut.beicd tht o. corporaA4ioa li-ke a z-tL.jral
person say act as the agent of a corporation. Attention is cal3di, to the
following quotation from the opinion of the Sc.prsze Xcurt of A.Lbeaca in
the recent cass of the Ala. Power Jo. v. oJCine:. 105 -So. &69:
"The relation of m=.ter and. sc;-vaat Vay eoist
between co-rporations as between ihbivlduals.
Efldence teudiag to indicate a reserved control or
direction of the work negatives the idea of an ii.epeiide:it,
original ccntractz:, having full control ,.ni resporUs'.b1e
for the completed work according, to contract. Whatever
be the relations Detween the Albans Power Cgom.uny ad,
Dixie Constraction Gompany inter stree, and Tor:a-ra the
employees of each, if an eleLwa1t of agency enters touch:,. :'
matUers aiffectiag Whe ri&.ts of tird. Le r ons, the principle
becomes liable for czce done Bithin the scope ol ti, agency
In the case of the NSe- York Trust Qoc.arq v. C-rpe.ter, 250 C. r,&.,
the Court said:
90f course, if a. ccrporattion. ie the agent ot .:.othc:,
owraing it stock or not, :s thbe caco zay be, thro.,-h wi:-ch
the oCher as principal, disclosud or iuadiscaosucdv, ca--rius Lfn
business, the liability of the principle ;-l ril oc arcorta4n1-t
through principles of law well known aM:. lone, eLtatlt'VC.."'
On barh 6, 1925, the Circuit ourt of jpals f49 1b6 Silk. st
Orcult decided the eas o Bo6per-tadln Oo. v. aittlhw AM O6b.
4 7. (2d) 3.187. The folowing quotation from the opites shad le t u
f need refer only to the folol.ing deoisio of this
Court: Ricbmond A I. ostruatlon Co. v.Rv,'L oaA, etc., so.w ::::i
68 F. 1056 106; 15 0. C. A. 289, 34 L. i. 626N Pittsburgh l
Buffalo Co. v. Duacan, 232 .584. 587, 146 Co. S A.... ..I
Trust 0o. v. Carpenter, 250 F. 668, 672 at seq., 163 0. Go A2%.
and cases there cited. s maid in the DOncan wGeo (peg 6W7);. :
and quoted in the Carpenter Oame (pase 673); te mere fact : :S
the stockholders in two or more corporations are the saws, or 0"
one corporation ezorcleee a control over the other through 2o, l;
ship of its stock, or through identity of ite stocktolders, 0e0 0,::
not make either the agent of the other, nor does it moere tht-Il
one, so as to make a contract of one corporation binding upon 12k
other, where each corporation is separately organized under a I
distinct charter,' We reaffirm the language of this court In 2be
Carpenter Case (page 674): 'From an examination of nasm dnecistm
we venture to say that no corporation acting within it. powerS. hat
been held liable for the debts of another corporation legally ;
organized, because it controlled such corporation by reason of
ownership of its stock, or otherwise, except by reason of On-a
tract or on grounds of agency, or of ostoppel, or because the
controlled corporation has been used in such a way that the
maintenance of its character as a separate and distinct entity:
would work injustice,' This proposition is sustained by nmaz= .+
carefully considered authorities."
In general, corporations employing subsidiary corporations entW'
Into carefully drawn contracts covering fully and explicitly the busiaw
relations between them, and it would seem advisable in all instances Lo
cooperative associations using eubeidiary corporations to adopt this :
course. Attention Is called to thc following quotation from the 6opiatel":N
of the Supreme Court of Utah in thc cse of Boston omoe Mines Dev. 0o. V.
Clauson, 240 P. 165:
"It ay be conceded that such proceedings on the part
of corporations are sometimes open to grave suspicion. It
all depends upon tha ctrcumtarces attending the transaction.
In Fletoher, fyc. Corp. p. 1857, p. 913, it is said:
*'If tao right tc contract, sxilts, it is material
that the sane officers &nd stcichiolders control both con-
tracting, corporations, iF T'HNE IS NOO AD FAITH." (Italics
3ee, also, Salta v. CGhsd & ?aBor Piano Mfg. Co., et al.
(D. C.) 191 F. 46E, in th.lch. ii tht, fourth headoote, It Is said:
-- -- i.:!.:..
~III!I l this connection see also the case of Alt. Ref. Co. v. port Roboa
Tet. Crp.. 280 935.
i Althotugh it ia believed, thmt the majority rule with respect to cor-
: oatiom haTing the saw officers dealing with each other is announced
Mboe, yet it is subttted that it would be advisable to inquire in each
:Lwtance Into the desirability from a practical and legal standpoint of
Shaving the officers anut directors of a parent corporation and its subsi-
diary7 the saa persons. In fact ia a few Stateo it appears to be necessary
5 from 1 a legal standpoint for the officers of the two corporations to be dif-
!iiferent. 7 R. C. L. Sec. 333.
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